China SMID Internet_ Outlook 2025 - Key themes and where we stand on TCOM, BIDU, Tencent Music

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on the China SMID Internet sector, which includes companies with market capitalizations between $10 billion and $50 billion. Key players discussed include Trip.com (TCOM), Baidu (BIDU), and Tencent Music (TME) [1][2][3]. Core Themes and Insights 1. Market Dynamics: The China SMID Internet sector is characterized by two main themes: - Single vertical platforms (e.g., travel, mobility) that are structural winners in their categories. - New media companies (e.g., short-form video, streaming music) that face strong competition and have more tactical business models [1][2]. 2. Consumer Spending Shift: There is a notable shift in consumer spending from material goods to services and experiences, driven by post-COVID recovery and changing consumer preferences, particularly among Gen-Z [2][12]. 3. AI and Product Innovation: Companies are expected to focus on AI applications and product innovation, with a need for unique data ecosystems to effectively monetize these innovations [2][3][12]. 4. Travel Sector Recovery: The travel industry is anticipated to normalize in 2025, with robust growth expected in both domestic (approximately 10% growth) and outbound travel (approximately 18-20% growth) as the last effects of COVID recovery phase out [4][38]. Company-Specific Insights Trip.com (TCOM) - Growth Projections: TCOM is expected to maintain strong growth rates, with an estimated 18% revenue growth for 2025, driven by international expansion and sustained domestic growth [40]. - Market Position: TCOM is gaining market share in the online travel agency (OTA) space, currently at 45% penetration. The company is expected to continue expanding its offerings, including customized tours and car rentals [5][39]. - Earnings Outlook: The long-term earnings per share (EPS) growth is projected at mid-teens, supported by operational leverage and a strong competitive position [5][37]. Baidu (BIDU) - Monetization Challenges: Baidu is facing difficulties in monetization, with recovery expected to extend into 2026. The company is struggling with lower ad rates and building an effective AI ecosystem [5][9]. - Market Rating: Baidu is rated as Market-Perform, with a target price of $87, reflecting a cautious outlook on its recovery trajectory [9][10]. Tencent Music (TME) - SVIP Program Expansion: TME plans to enhance its SVIP products, which could drive user growth and increase average revenue per user (ARPU) above current levels. The company is rated as Outperform with a target price of $13 [5][10]. Additional Important Insights - Investment Implications: The overall investment thesis suggests that TCOM is a long-term quality compounder in the travel sector, while Baidu's challenges may limit its performance relative to peers [9][10]. - Consumer Behavior Trends: The shift towards experiences is expected to continue, with increased spending on travel, entertainment, and dining, indicating a robust recovery in consumer services sectors [12][17][25]. Conclusion The China SMID Internet sector is poised for growth, particularly in travel and new media, with TCOM showing strong potential for long-term performance. Baidu faces significant challenges, while TME is positioned to capitalize on its subscription model. The overall market dynamics reflect a structural shift in consumer spending and a focus on innovation and unique content.